2000 (8) TMI 240 - AT - Income Tax

Summary

Issues:
1. Disallowance of interest under section 36(1)(iii) of the IT Act.
2. Disallowance of interest under section 40A(2) of the IT Act.

Issue 1: Disallowance of interest under section 36(1)(iii) of the IT Act:
The Revenue appealed against the CIT(A)'s order deleting the addition of Rs. 37,500 made on account of disallowance of interest under section 36(1)(iii) of the IT Act. The dispute arose from the assessee's advance of Rs. 11,50,000 to M/s S.K. Fibres (P) Ltd. at 12% interest per annum, along with share application money of Rs. 5,01,000. The AO disallowed interest on the share application money as no interest was charged on it. However, the CIT(A) disagreed, noting that the loan raised from sister concerns was utilized for business purposes, and interest was charged and credited to the assessee's account. The CIT(A) found no justification for the disallowance and ruled in favor of the assessee, leading to the appeal by the Revenue being dismissed.

Issue 2: Disallowance of interest under section 40A(2) of the IT Act:
In the cross-objection, the assessee challenged the disallowance of Rs. 15,870 out of total interest paid at Rs. 48,480 under section 40A(2) of the IT Act. The AO had disallowed the interest on payments made to close relatives at 12%, considering it a market rate. The CIT(A) upheld the AO's decision, but the appellant argued that the Tribunal had previously deemed a market rate of interest reasonable up to 24%. The appellant contended that interest at 12% was reflective of trade norms and was duly recorded in the books. The Tribunal agreed with the appellant, allowing the cross-objection and dismissing the Revenue's appeal.

In conclusion, the appeal by the Revenue was dismissed concerning the disallowance of interest under section 36(1)(iii), while the cross-objection by the assessee was allowed regarding the disallowance of interest under section 40A(2) of the IT Act.